October 25, 2012

MU0013 [Human Resource Audit] Set1 Q1/Set2 Q2

Q.1 Discuss the conceptualizing of HR Audit (or) Discuss approaches to HR Audit.

Ans:

As the term audit has evolved, it is becoming increasingly specific, until the term functional audit has emerged. The objective of a functional audit is to diagnose, analyze, control, and advise within the boundaries of each functional area of the company. 

The HR audit is also a functional audit which emphasise on the well being of HR functions in the organisation. Thus, as a first approach, one could say that HR auditing consists of diagnosing, analyzing, evaluating, and assessing future lines of action within the framework of HRM. 

HR auditing is one of the basic tools for the management of a company. It not only attempts to control and quantifying of results, but also the adoption of a wider perspective that will aid in defining future lines of action in the HRM field. 

HR auditing must perform two basic functions [Cantera, 1995]. 
It must be a management information system whose feedback provides information about the situation in order to facilitate the development of managing processes or the development of HR. 
It must be a way of controlling and evaluating the policies that are being applied, as well as the established processes. 

In order to secure the operative efficiency and user or client satisfaction, an appraisal of the results of the HR function is necessary. The results can be valued through their cost (a measurement internal to the function) [Walker, 1998]. This would lead the company to consider some basic points:
There are adequate HR policies being developed in the organisation or not.
There are the desired results being obtained from HR policies being followed.
The extent to which HR policies add value to company 

The main objective of this work is to offer a few guidelines for the appraisal of the HR function, which is in itself the basis for the auditing process. The purpose is to set conceptual limits for its content and to present the different approaches with which the HR audit can be presented. 

HR auditing in recent years is not only considered mere instrument of control an but also has become a necessary decision making tool in personnel related matters according to the global objectives of the company. As a result, all of the functions and competencies of HR auditing are being progressively expanded.

Conceptualization of HR Auditing
Auditing has evolved, becoming increasingly specific, until the term functional audit has emerged. The objective of a functional audit is to diagnose, analyze, control, and advise within the boundaries of each functional area of the company. 

The HR audit is a type of functional audit. Thus, as a first approach, one could say that HR auditing consists of diagnosing, analyzing, evaluating, and assessing future lines of action within the framework of HRM. HR auditing is a basic tool for the management of a company. Its objective is not only the control and quantifying of results, but also the adoption of a wider perspective that will aid in defining future lines of action in the HRM field. Thus, HR auditing must perform two basic functions [Cantera, 1995]. First, it must be a management information system whose feedback provides information about the situation in order to facilitate the development of managing processes or the development of HR. On the other hand, it must be a way of controlling and evaluating the policies that are being applied, as well as the established processes.

It can be understood that in order to secure the operative efficiency and user or client satisfaction, an appraisal of the results of the HR function is necessary. According to this approach, the results obtained can be valued from certain HR policies (an external type of measurement), or from the results of the policies or the policies themselves. The results can be valued through their cost (a measurement internal to the function) [Walker, 1998]. This would lead the company to consider some basic questions. Are adequate HR policies being developed? Are the desired results being obtained? To what extent do they add value to the company? The purpose of this work is to offer a few guidelines for the appraisal of the HR function, which is in itself the basis for the auditing process. The objective is to set conceptual limits for its content and to present the different approaches with which the HR audit can be presented.

Approaches to HR Auditing
HR auditing has evolved in recent years to the point that it has ceased to be a mere instrument of control and has become a necessary decision making tool in personnel related matters according to the global objectives of the company. As a result, all of the functions and competencies of HR auditing are being progressively expanded. This is creating a distinction between its component elements and the different types of HR audits. In this way, Walker [1998] differentiates between two approaches relative to HR auditing: those centered in the Function’s internal aspect, and those centered on the external aspect. From an internal perspective, as in any staff function, there is a trend of valuing its actions as a result of the activities undertaken and its costs. Capability would be judged on its ability to supply certain services to the organization at the lowest possible cost. Under this approach, the operational measurements traditionally used are those which refer to quantity, quality and reliability, or cost and speed, therefore placing the focus on activities, costs, or productivity ratios.

From an external perspective, if it is understood that the ultimate appraisal of the effectiveness of HR is based on their impact on the company’s results, then the measurements should include results obtained outside the function.

Another well-known classification of HR audit approaches, which is used to structure the present work, is the difference between three focuses, which are the legal audit of performance or conformity, the operative or efficacy-based audit, and the strategically audit.

The Legal Approach in HR Auditing
This best concept of HR auditing is based on a legal outlook. According to Antona [1993, p. 2], the audit of performance or conformity consists of making an inventory of the social situation of the company, considering the labor law norms and regularly verifying the company’s compliance with the applicable regulations.. Thus, this concept is centered on the verification that the current labor laws are being fulfilled. The audit should verify if the firm’s policies, practices, and documents regarding employee hiring, retention, discipline, termination, and post-employment are both fair and legal [Higgins, 1997]. These practices and policies must: prohibit discrimination by offering equal employment opportunities; protect the employment seeker from being discriminated against on the basis of age; carry out minimum wages; and contain provisions regarding mental disabilities and reasonable accommodations for disabled workers.

According to Nevado [1998, p. 49], the basic functions of the audit of conformity or of performance as an element of HR auditing are threefold. The best function is examining to see if the firm is fulfilling all its administrative social obligations, as well as those relative to the collective rights of its personnel. The second is to study the relationship between the employees and the firm based on the legal statutes. The final function is verifying if the firm fulfill its financial obligations (for example, social security payments), as well as its informative ones.

Concern about labor risks has created a function within HRM with the purpose of altering working conditions by identifying the risks that could stem from them and implementing necessary preventive measures. Such preventive activity could but perfectly into the legal approach of HR, although the effort that the company can make in this sense can go beyond. the application of the existing risk prevention laws. The requirement for labor security and hygiene is a part of the search for quality of life in the workplace, which is becoming increasingly demanded from companies.

Focus of the Function Audit
The function audit centers on .observing if the procedures applied are the adequate ones and if they function correctly. That is, checking to see if the relationship between objectives and procedures is a satisfactory one and if this has been achieved in the most cost effective manner. [Nevado, 1998, p. 50]. The function of this level of the HR audit is to study and analyze each one of the specific areas of HRM. The analysis should center on the planned measures, the method of implementation, and the results obtained. In order to carry this out, the areas that are to be studied must First be identified. 

Afterwards, a list of the indicators that will serve to analyze each of them must be made. These indicators can be either quantitatively (absolute numbers or ratios) or qualitatively derived from the responses given by the people involved (management, employees, or external experts). A list of the indicators corresponding to the different areas of the HR function could contain some of the following.

1) Description of the Company’s Staff.
The complete staff can be described by: hierarchic levels, years of service, qualification, sex, and nationality; the number of permanent and temporary employees, interns, and physically or mentally challenged employees; and indexes of personnel rotation and absenteeism.

2) Job Analysis:
Job analysis can include: the number of described posts and occupants per post; the degree to which the job description cards have been updated; the degree of detail in the job description cards; and the methods used to analyze and describe the jobs.

3) HR Planning:
Planning includes the methods employed to plan personnel needs, the measures adopted to cover future personnel needs, and the temporary planning horizon.

4) Recruiting and Personnel Selection: 
This includes: the number of days needed to fill a vacant post; the number of applications received by work place categories; the average amount of days between the reception of the application and the Final answer; the average cost of recruitment and selection per job post; the degree to which internal and external sources of recruitment are used; the average number of candidates that do not pass the selective tests; a study of the reliability and validity of the selection tests; and the degree to which the recruiting efforts but the company’s business plan.

5) Training
The training indicators are: the procedures followed and the frequency with which personnel training needs are analyzed; the criteria followed to developed the content of the training programs; the evaluation criteria of the efficacy of the training programs; the percentage of the HR budget dedicated to training; the average number of hours of training per employee; and the percentage of employees that participate in training programs by work place categories. 

6) Development of Professional Careers:
These indicators include: the percentage of people promoted per number of employees; the percentage of vacancies covered internally and externally; and the average time per employee it takes to receive a promotion.

7) Retribution
Retribution can be measured by: the average wage per employee and wage difference among employees; the Axed and variable components of retribution; the percentage of remuneration linked to the employee’s yield; and the internal equity and external competitiveness of the retribution system.

8) Performance Evaluation
Evaluation indicators include: the level of usage for promotion or career; the level of feedback of results to the company’s personnel; and the degree to which poorly performing employees are assisted in improving their performance.

9) Work Conditions
Work conditions can be assessed by the frequency and index of the graveness of work- related accidents and by the labor accident and sickness prevention policies that are in place.

1 Approaches to Human Resource Audit by Walker
Walker [1998] differentiates between two approaches relative to HR auditing i.e. those centered in the functions internal aspect, and those centered on the external aspect.

Internal perspective: From an internal perspective, as in any staff function, there is a trend of valuing its actions as a result of the activities undertaken and its costs. The way of judging departments capability would be on its ability to supply certain services to the organization at the lowest possible cost. According to this approach, the operational measurements traditionally used are those which refer to quantity, quality and reliability, or cost and speed, therefore placing the focus on activities, costs, or productivity ratios.

External perspective: From an external perspective, if it is understood that the ultimate appraisal of the effectiveness of HR is based on their impact on the company's results, then the measurements.
Should include results obtained outside the function.

2 Common approaches to Human Resource Audits
There are five common approaches for the purpose of evaluation of HR in any organization: 

Comparative approach: In this approach, another division or company that has better practices or results is chosen as the model. The audit team audits and compares the audited firms results with the best practices of the model organization. This approach is commonly used to compare the results of specific activities or programs. The approach is often used with turnover, absence, salary data and staffing levels. It helps detect areas where improvement is needed. It also makes sense to compare where a procedure is being used for the first time.

Outside authority: In this approach, standards set by a consultant or taken from published research findings serve as the benchmark for the audit team. The consultant or research findings may help diagnose the cause of problems.

Statistical: This approach relies on performance measures drawn from the company's existing information system. From existing records, the audit team generates statistical standards against which activities and programs are evaluated. With the mathematical standards as a base, the team may uncover errors while they are still minor. Often this approach is supplemented with comparative data from external sources such as other firms, or industry association surveys. The information is usually expressed in ratios or formulas that are easy to compute and use.

Compliance approach: This approach reviews past practices, to determine if actions taken followed legal requirements and company policies and procedures. The audit team here often examines a sample of employment, compensation, discipline and employee appraisal forms. The purpose of the review is to ensure that the field offices and the operating managers have complied with internal rules and legal regulations, such as minimum wages and equal employment opportunity laws. By sampling elements of the human resources information system, the audit team looks for deviations from laws and company policies and procedures. The team can then determine the degree of compliance achieved. 

Management by Objectives (MBO): In this management by objectives approach, managers and specialists set objectives in their area of responsibility. Then  they create specific goals against which this performance can be measured. The audit team researches actual performance and compares it with the previously set objectives. They can then evaluate the trends in this area.

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